Pimco’s Gross: Central Bank Easing Is ‘Monetary Red Bull’

Efforts by the world’s central banks to pump liquidity into markets are the equivalent of “monetary Red Bull,” according to Bill Gross, co-CIO of fund giant Pimco, and there will be consequences later for that rush.

Equity markets have been increasing because of this easing, he told CNBC, and the near-zero interest rates will eventually be a drag on earnings growth. The cheap money will also lead to relatively compressed margins, negative growth and layoffs.

“We’ve had a $75 billion [easing] program [in Japan] every 30 days, which is in effect the largest relative quantitative easing program ever — an amount nearly equal to the [Federal Reserve’s] in an economy one quarter the size,” Gross explained.
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“Financial markets are really feasting on an anticipated monthly gulp of Japanese-flavored Red Bull,” he added.

“We don’t necessarily endorse this Red Bull product, but we recognize its ability to energize financial markets. Monetary Red Bull can feel good for a while — it doesn’t have many calories. But it does have some negative consequences down the road” on asset prices.

The Fed’s purchases of $85 billion in mortgage-backed securities and Treasury debt monthly is also inflating both equity and bond markets and falsely inflating the economy, he noted.

“At some point, [the Fed] is going to own, along with other central banks, perhaps 60 to 70 percent of the Treasury market. That, in effect, eliminates the technical aspects and the liquidity of Treasurys and other bond markets and ultimately stocks as well,” Gross explained.

“[The Fed talks] about tapering and they’re sort of giving the signal that at some point they’ll have to. If the Fed continues to buy a trillion dollars a year, that expands their balance sheet by 4 to 5 percent of GDP every year,” he added.

“The Fed knows that it can’t keep doing what it’s doing, and we wonder what happens when they stop.”

Gross is expecting changes in the credit markets during the next several years.

“We have seen an expansion [in the credit market] since the 1970s, when [President Richard] Nixon went off the gold standard, from $3 trillion worth of credit to $56 trillion now,” he explained.

“It’s a fair question to ask whether that credit can keep on expanding at zero percent interest rates — whether or not the magic elixir of real interest rates in the ‘70s, ‘80s, ‘90s will produce the same magical results as they have in the past.”

Because of the changes in the credit market, any company that deals in financial asset are seeing their net interest margins narrowed, he noted.

“When you look at a bank in terms of net interest margins, they borrow at the same yield, at 25 basis points, but they can only lend at perhaps 2 to 2.5 percent,” Gross maintained.

“That’s not good for business formation going forward. Banks, in effect, lay off employees, close branches, etc., and you see negative real economic growth based on that.”

Gross has said the U.S. economy won’t expand more than 2 percent this year even with one or two quarters of faster growth.

“A 2 percent ‘new normal’ economy is the best we can expect,” Gross said in a radio interview with Bloomberg Friday.

“We see 3 percent GDP [gross domestic product] for the first quarter and then slower growth for the next nine months,” he told CNBC.

Efforts by the world’s central banks to pump liquidity into markets are the equivalent of “monetary Red Bull,” according to Bill Gross, co-CIO of fund giant Pimco, and there will be consequences later for that rush.